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Centamin plc (CEY.L) is a mineral exploration, development and mining company, and operates in Australia, Jersey, Egypt, Burkina Faso and Cote d’Ivoire. Its principal asset, the Sukari Gold Mine (SGM), is located in the Eastern Desert, approximately 900 kilometers from Cairo and 25 kilometers from the Red Sea. SGM is jointly owned by Pharaoh Gold Mines NL (PGM) and Egyptian Mineral Resource Authority (EMRA). It has a license holding over an area of approximately 100-kilometer trend of gold mineralization in Burkina Faso. CEY holds a tenement package over an approximately 2,200 square kilometer area in southern Burkina Faso, adjacent to the border with Cote d’Ivoire. It has seven permits in Cote d’Ivoire covering an area of over 2,330 square kilometers. Six of these are part of the Doropo Project across the border from Batie West in Burkina Faso and the other is in the west of the country.
On Feb 1st 2017, CEY published results for year ending Dec 31st 2016. Gold production of 551,036 ounces marked a 26% increase on 2015 and was above the revised guidance range, while the cash cost of production of $513 per ounce was down from $713 per ounce in 2015 and below the revised guidance range. EBITDA grew by 145% to $373m, due to higher gold prices, increased production and lower costs. As a result, basic earnings per share grew by 313% to 18.61 US cents. Chairman Josef El-Raghy said that the seventh successive year of production growth and reductions “has allowed Centamin to maintain its strategic focus on generating shareholder returns and value-accretive growth.” “A significant milestone was achieved during the year, as the capital investment in the Sukari operation by Centamin’s wholly-owned subsidiary Pharaoh Gold Mines was recovered from cash flows to the extent that profit share commenced with the Egyptian Government during Q3. Centamin ended the year with $428m in cash, bullion on hand, gold sales receivables and available-for-sale financial assets, an increase of $197m during the year. “ He added; “I am pleased to announce that a final dividend for 2016 of 13.5 US cents per share has been proposed, representing a full year pay-out of $178m, equivalent to approximately 70% of our net free cash flow in 2016.”
While CEY has long been a favourite stock among gold investors, the latent potential among the company projects, and the flagship Sukari gold mine have resulted in the stock consistently flagging up value across VectorVest financial metrics. The stock scores highly on GRT (Earnings Growth Rate), RT (Relative Timing) and RV (Relative Value), and shows a fair rating on RS (Relative Safety) and DS (Dividend Safety). The key metrics of VST, the master indicator for ranking every stock in the VectorVest database, sees CEY score 1.37, which is very good on a scale of 0.00 to 2.00. And in terms of value, CEY scores 267.23p, meaning at the current 173p, the stock is undervalued.
The chart of CEY.L is shown below using the normal VectorVest notation. The price is in candlestick format while the VectorVest valuation is shown by the green line study. Earnings per share (EPS) is shown in the window below the price by the blue line study. EPS has more than doubled over the last year.
While the gold price has been falling over the past few days CEY has risen. The share has broken and kissed a down sloping trendline and is in the process of breaking out of an inverted head and shoulders reversal. The head and shoulders break out will be confirmed by a close above 180p.
The technical target from such a move would be a repeat of the upmove that occurred from January to September 2016. This would compute a technical target of around 250 which is similar to the present VectorVest valuation.
There is risk in mining stocks and the opportunity is for those who can size positions correctly and manage risk aggressively.
Summary: Current global uncertainties should ensure that gold remains a popular safe haven asset for the foreseeable future, and this will no doubt be reflected in investor demand for shares of cornerstone producers such as Centamin. The high score CEY delivers across key VectorVest metrics, coupled with a promising charting configuration add up to a compelling investment case for this long established gold miner. Buy.
March 15th 2017
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